UK government to pump £30m into banks

British Chancellor Alistair Darling today defended British government plans to pump another £30bn (€33.2bn) of public money into banks - insisting the taxpayer was getting a "better deal".

Speaking as moves to break up the part-nationalised Royal Bank of Scotland and Lloyds Banking Group to appease European competition fears were confirmed, the Chancellor said "progress" was being made.

"I believe that what we have got here is better structured," Mr Darling told the BBC Radio 4's 'Today' programme. "It is a better deal for the taxpayer."

RBS is selling RBS-branded branches in England and Wales, its NatWest branches in Scotland, the Churchill and Direct Line insurance arm and parts of its investment banking business as the price of state support.

Lloyds Banking Group will offload its Lloyds branches in Scotland, its Cheltenham & Gloucester branches, and the Intelligent Finance online business.

RBS confirmed plans to place £282bn (€312.1bn) in toxic debts into a British taxpayer-backed insurance scheme, taking the Treasury's stake to 84%. Lloyds is avoiding the scheme after announcing £21bn (€23.24bn) fundraising plans.

The bank, as expected, will pay £2.5bn (€2.76bn) to the British government as a break fee for withdrawing from the Asset Protection Scheme (APS), which would have seen it pay £15.6bn (€17.26bn) to insure £260bn (€287.7bn) in toxic loans, with the taxpayer stake rising to 62%.

The UK government will pump in around £30bn (€33.2bn) more into the two banks under the proposals.

Lloyds will receive an extra £5.7bn (€6.3bn) in public money to support its record £13.5bn (€14.94bn) cash call on shareholders.

RBS will receive £25.5bn (€28.2bn) in cash upfront from the British Treasury as part of the plans for the APS - although the bank will also be able to call on an extra £8bn (€8.8bn) if needed.

The company, which is currently 70% state-owned, will no longer pay a £6.5bn (€7.19bn) fee but is responsible for a much bigger than originally planned £60bn (€66.4bn) "first loss" before the taxpayer support kicks in.

The Treasury said both banks would be required to meet "tough conditions" on pay and lending.

Existing commitments to make £39bn (€43.1bn) available for homeowners and borrowers will remain in place "to translate into increased lending in the economy".

Meanwhile, bonuses for executive directors due this year will be deferred until 2012, while no discretionary cash bonuses for any staff earning more than £39,000 (€43,176) will be paid this year.

Mr Darling said today that he hoped the measure would lead to "more competition" among High Street banks.

He told BBC Radio Scotland: "At the moment we really have about half a dozen large banks providing banking services in this country. Yes, there's lots of building societies, but the market is dominated by them."

The Royal Bank of Scotland was "utterly bust" a year ago.

He went on: "If we hadn't done anything it would've collapsed - everything would've gone."

The restructuring process now is "painful", Mr Darling said.

But he added: "All the time what I want to try and do is firstly make sure that we ultimately get the taxpayer's money back and secondly, as we come out of this, offer a better deal for customers."

European state aid requirements also mean that the banks would have to be smaller than they were, the Chancellor added, but the British government has been working with the EC to ensure that the branches were not "gobbled up" by existing banks.

Mr Darling added: "As a result of what we've done today, the government has managed to get rid of a potential liability of £300bn (€332bn), mostly with Lloyds, but also partly with RBS."

Mr Darling said: "If we look at Lloyds first of all, what would have been unthinkable even six months ago is that Lloyds could go out and raise some £20bn (€22.13bn) from the market in order to ensure that it strengthens its position.

"Because it is a rights issue, that means they are offering shares to existing shareholders and we are taking our shares so the value of what we hold in Lloyds does not go down.

"But I think, if you look at it, the fact that we are getting private money coming in, and at the same time we no longer have to insure £260bn (€287.7bn) of assets and we are getting a fee of about £2.5bn (€2.7bn) for what we have already done for Lloyds, I think that is progress, Lloyds getting money from the private sector, from the markets.

"It will mean the taxpayer's exposure is much reduced."

Mr Darling said it was not yet possible to get more private money into RBS.

"What we are doing there is that RBS is going to have to take a bigger share of any losses," he said. "I know it is difficult but I think it is a better deal for the taxpayer."